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MNI BCB Preview - Dec 2023: 50BP Easing Pace Remains Appropriate

MNI BCB Preview - Dec 2023

MNI BCB Preview - Dec 2023

Executive Summary:

  • All surveyed analysts believe the Copom will continue the easing cycle with another 50bp cut, bringing the Selic rate down to 11.75%.
  • Prior guidance in the November statement and most recent comments from central bank board members have reiterated that economic conditions remain consistent with this strategy.
  • However, market participants will be alert for any tweaks to the statement to provide clues on whether the easing pace could be adjusted in the first half of 2024.

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MNI Brazil Central Bank Preview - December 2023.pdf

Fiscal Uncertainties Have Eased, Will Remain Lingering Concern

Prior to the November meeting, the most interesting development was the reemergence of fiscal uncertainties in Brazil, with Finance Minister Haddad acknowledging that the fiscal scenario had become increasingly “challenging”, and markets concerned about adherence to the fiscal targets. However, Haddad has since won an internal battle to maintain the goal in next year’s budget outline, buying time to continue his efforts to deliver. On the topic, BCB Governor Campos Neto stated that “the government is showing it has the willingness to pursue the target, and we have been stressing that pursuing the target is what’s relevant.”

Furthermore, Campos Neto highlighted that an adjustment of the fiscal targets does not necessarily have a mechanical impact on the central bank’s reaction function but that it has the potential to negatively impact inflation expectations. “If you have less visibility over the fiscal trajectory, you will have a fiscal risk premium - and the evidence tells us that when you have an increasing fiscal risk premium, eventually future inflation expectations will rise as well,” Campos Neto said.

Overall, the governor has explained that the central Bank sees marginal changes in the country’s economic scenario since the last monetary policy meeting, with inflation converging as expected. Cementing the expectations for this meeting, and perhaps the next, Campos Neto reinforced that he sees the 50bp cut rate as “appropriate” and he sees a 50bp cut for next monetary policy meetings.

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